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Sunday, February 11, 2007

Evening State of Play - NEW, NFI, Vonage, EOP, etc

There's a downside bias to pretty much everything tonight. Gold, after roaring higher last week is down over $2 tonight, crude lower by 75-cents after dipping late session Friday and ahead of Feb contract expiration later in the week. EuroFX is drifting higher.

Stock futures remain lower as well. See last night's post on my discussion about the possibility of it being time for the for the Dow and S&P to play some downside catch-up to the Nasdaq and that expiration may tilt things lower as later in the week. 10 yr note is down 12/32nds pushing the yield up to 4.786%.

Not sure if that guy is Ben's long lost twin! What's worse is that certain media outlets will broadcast the guy wall to wall even though his prepared text will be released shortly beforehand and can be quickly analysed, reported on and then moved away to something far more important like the latest on lint futures. Bernanke speaks Wednesday and for added fun on Thursday. 2 thrills for the price of one (as much fun as my bone marrow biopsy a few years ago where they just kept jabbing the looong needle in for that extra sample of marrow).

There's a good deal of economic data for the markets to sift through in the week ahead including retail sales figures and business inventories on Wednesday; Empire State manufacturing, Import Prices, Jobless Claims and Industrial Production on Thursday and Housing Starts, Producer Price Index and Consumer Sentiment on Friday.

The earnings calendar is getting a bit lighter, but still some important results. Monday features figures from Loews and Yum; Tuesday Applied Materials, Nvidia,Alterra and KB report; Wednesday Coca Cola, Deere, Network Appliance, Office Depot; and Thursday Biogen, and Baker Hughes. That's just a smattering - there are others and as I find things of interest I will mention them.

Subprime carnage will be front and center on Monday. Barron's gave New Century a big thumbs down.

I will be closely watching my Novastar (NFI) March puts. While I expect these stocks to operate under a great deal of pressure for some time to come, I have had a lot of time this weekend to consider NFI's dividend and talk to far greater minds than mine. I have swung into the camp that now believes NFI will have upwards of $5.00 a share in undistributed taxable REIT income from 2006 that will have to be declared as dividends this year. So I am doubting they will cut their dividend any time soon. That's simply amazing to me. They now have a dividend yield of about 35%!! That may very well counterbalance whatever bad news is coming with respect to increases in loan loss provisions and overall losses that will be announce whenever they release 4th quarter results. I may soon be selling those NFI puts which have already reaped tremendous gains. But having said that, I see no major opportunity for the long side.

Think about it. We're talking yield alone driving the stock versus the subprime industry going deeper into the crapper by the day and putting downward pressure on the stock. That's not a great reason for a whole lot of fresh money to be deployed toward NFI shares. I see upside at most at its 10 day moving average: $19.89 which hasn't been broken since mid December. $21 tops, the 20 dma on something spectacular out of earnings, but let's face it - 2007 estimates are coming WAY down (great Elvis song) and I think to the extent they come down along with the dividend decides if it gets to 19 or 21. Of course, God have mercy on them if somehow there isn't the spill over income expected to distribute to shareholders... but there should be aplenty!

A few other quick Barron's notes:

They panned Vonage, said Blackstone's purchase of EOP is a big gamble and United Health is poised to recover. Barron's gave a big wet kiss to Costco; also noted that Singapore might be the safest way to play Asia, and that Opnext looks like the next hot IPO.

In a presentation it made last week at the American Securitization Forum posted on the SEC web site, NFI left out data on its 2006 payment defaults and provisions for credit losses. Since it included loan production data for 2006, it is curious that NFI chose to exclude the credit loss data. In its most recent quarterly report, NFI's provision for credit losses was up 20-fold from $1 million in the nine months ending September 2005 to $20 million for the same period in 2006. NFI could have used this Forum to reduce investor concerns about credit quality by presenting updated numbers. Its decision not to include these numbers raises the question of why it chose not to do so.http://www.sec.gov/Archives/edgar/data/1025953/000102595307000014/ex99.htmNFI has an attractive dividend yield. But in the most recent nine month period, it ended up with $82.5 million less cash than the year before. If that trend continues, NFI may decide to cut its dividend.

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